This guidance note was prepared by International Monetary Fund (IMF) and World Bank Group staff under a project undertaken with the support of grants from the Financial Sector Reform and Strengthening Initiative, (FIRST).The aim of the project was to deliver a report that provides emerging market and developing economies with guidance and a roadmap in developing their local currency bond markets (LCBMs). This note will also inform technical assistance missions in advising authorities on the formulation of policies to deepen LCBMs.

Deep and efficient domestic government debt markets help provide resilience to shocks in times of financial turbulence and convey multiple economic benefits. Recent financial crises, including the turmoil in financial markets caused by the coronavirus disease (COVID-19) pandemic, have shown that efficient LCBMs can increase financial resilience by mitigating currency risk, which is often a source of financial distress. In addition, the development of LCBMs is a cornerstone of broader capital market development that helps to price risk appropriately, allows participants in financial markets to better manage their portfolios, and provides a more effective conduit for monetary policy. In turn, these factors help boost a country’s long-term economic growth potential.

Developing domestic debt markets is a complex process that requires multiple and interdependent policy actions. Though broad guidelines and general principles to develop LCBMs are readily available, their translation into specific reforms is a daunting task because it requires actions from a broad range of stakeholders, including the debt manager; the central bank; regulators; the providers of trading, payment, clearing, and settlement systems; and other policy makers. As countries tend to be at different levels of development along these various dimensions, the further development of their LCBMs will be path-dependent and require a country-specific, customized approach.[…]